Monday, November 7, 2016

If you pay people to work less, they work less.

Well this is interesting. By no means the end of the debate but an additive data point. The debate is whether the benefits of guaranteed minimum income maintenance (healthy sustainable life) are outweighed by the costs (disincentive of the recipients to work and disengagement of those being asked to support others). From The Long-Term Effects of Cash Assistance by David J. Price and Jae Song. The abstract.

We investigate the long-term effect of cash assistance for beneficiaries and their children by following up, after four decades, with participants in the Seattle-Denver Income Maintenance Experiment. Treated families in this randomized experiment received thousands of dollars per year in extra government benefits for three or five years in the 1970s. Using administrative data from the Social Security Administration and the Washington State Department of Health, we find that treatment caused adults to earn an average of $1,800 less per year after the experiment ended. Most of this effect on earned income is concentrated between ages 50 and 60, suggesting that it is related to retirement. Treated adults were also 6.3 percentage points more likely to apply for disability benefits, but were not significantly more likely to receive them, or to have died. These effects on parents, however, do not appear to be passed down to their children: children in treated families experienced no significant effects in any of the main variables studied. These results for children are estimated precisely enough to rule out effects found in other contexts and inform the literature on intergenerational mobility. Taken as a whole, these results suggest that policymakers should consider the long-term effects of cash assistance as they formulate policies to combat poverty.

Kudos for actually doing a follow-up.

Further details on the original program:

We are able to identify these effects by following up, after four decades, with participants in the Seattle-Denver Income Maintenance Experiment (SIME/DIME), which began in 1970. This experiment, described in more detail in Section 2, guaranteed a minimum annual income of up to $25,9008 to about half of the 4,800 low- to middle-income families enrolled. Treated families, randomly chosen from among all enrolled families, received the full guaranteed income if they earned no outside income; they then faced taxes of 50% to 80% on outside income, up to the point where the program no longer benefited them. Treated families received this financial guarantee for three or five years, and treatment enabled an individual to receive, on average, $2,400 extra annually in government benefits during the experiment, compared to control individuals who did not receive any SIME/DIME guarantee.

Short answer - guaranteed minimum income seems to create a disincentive to work, a disincentive to life planning, and a proclivity to claim further public funds even when not warranted. In the short term, people worked fewer hours when they had assistance. Once they lost assistance, they worked as much as others in the experiment who had not received supplemental income but were less prepared for retirement.

Actually, the results are worse than they seem. It is not only that the program did not work. It is that the program had detrimental life outcomes:

These effects for adults, described in more detail in Section 4, are large relative to the cash assistance received: for every $1 in additional government transfers, we find that individuals earn discounted lifetime earnings that are $4.50 lower.

That's a very high negative multiplier. Giving people more money for guaranteed income means that over their lifetime, they are nearly five times the amount you give them worse off than if you had left them alone. For every $1,000 of assistance, they earn, over their lifetime, $4,500 less. That is bad for them as individuals and even worse for society. From a societal perspective, the $1,000 of assistance might have gone to road building, or education, or security - things that could have produced multiplier benefit effects. So from a society perspective, you give up the benefits the money might have bought as well as make the individual recipients worse off. Finally, to make it even worse - most governments operate at a deficit. The $1,000 was borrowed against the future. You have to factor in the interest over forty years as well. All-in-all, this well intended effort had dramatically bad outcomes.

This does not put the issue to bed. The program was a long time ago and only lasted 3-5 years. Perhaps that was not long enough a span to have beneficial impact. Perhaps the guaranteed income of $25,000 was too low. All are real possibilities.

None-the-less, the results are consistent with what economic theory suggests. People respond to incentives and if you reduce the cost of not working, people will work less.